She caught my attention by noting two things. First, 46% of the billionaires listed by Forbes made their money in buying/selling or developing real estate. Second, while attending a recent conference of financial CEOs in New York, as a group, they stated how positive they were about real estate - “show us an asset that has been beaten up as much as real estate.”

Where’s the power?

We got into trouble about five years ago when people could get into real estate for effectively nothing down. “Fog a mirror, and you can get a loan,” was the saying. Carole has a clear way of explaining this. If you buy an asset, you need to invest in it. In other words, you need to put enough down so that YOU have the power. Putting nothing down means that you effectively give the power to someone else, i.e. the lender. Ergo, they have the power to foreclose and throw you out. If you have the power, then you can decide if and when to sell. Real estate is not an asset that you can trade like a stock. You need to hold it for a period of time. Time, value, money are the keys to creating wealth.

Overpaying?

Is now a good time to buy a San Francisco condominium for $750,000? That is currently the average price for a condominium in the city. The range - $525,000 for an 800 sq. ft. one-bedroom/one bath unit to more than $1.3 million for a three-bedroom/three-bath 2,000 sq. ft. unit.

I guess the answer depends on how long you plan to hold the asset, where it is, how easy it would be to sell it, etc. Is Google a good buy at $585, Apple at $310 or Goldman Sachs at $160, or maybe gold at $1,365/ounce? Which of these assets will appreciate more over the next five years? Would you be overpaying for any of them at today’s prices? Except for real estate, none of them has been “beaten down.” Obviously, you need to do a lot of homework to answer the question.

Real estate is not as valuable an asset in Florida, Las Vegas, southern California, Arizona, etc. There is too much land in those places. The value of an asset and its potential for appreciation is in the fact that it is limited. The value of a San Francisco condominium and single-family home is in the land, not the structure. We know that the City is covered by water on three sides and there is no more land to build condominiums except for converting existing uses south of Market Street. There is no land to build single-family homes.

Buy versus rent

Let’s use $750,000 for the average sale price of a condominium in San Francisco. At that price, we can get a two-bedroom/two-bath unit in a decent neighborhood. To buy it we need to put $150,000 down or 20% and obtain a 30-year fixed mortgage at 4.5% or better. Our monthly payments will be roughly $3,040 Add in property taxes at $727/month, and estimated HOA dues of $600/month – all told say $4,367. Alternatively, we can rent an apartment/condo for $4,000 per month.

If we decide on renting, after five years we have nothing to show for the $240,000 rent payments that we made. With a purchase, we have created equity of approximately $50,000 (the principal portion of our monthly mortgage payments) not to mention a write-off from the interest and property tax deductions. And then there is the possibility of asset appreciation if we buy right and the markets heal themselves (eventually they will). With a rental, we have no chance of creating wealth. Wealth is about money working for you.

Yes, I know there is the subject of the down payment. That’s the investment we need to make, one way or another – save it, borrow it, steal it, find a way. It’s worth it. Where else can you borrow 80% and realize appreciation just with inflation? Besides, you can live in it. Thanks Carole.

Written by: Malcolm E.A. Kaufman

E-mail: mkaufman@pulsefactors.com

Starboard TCN is posting this article on its website and blog with Malcolm E.A. Kaufman's approval.